The S&P 500 keeps clawing its way higher. This is despite the fact that many market bears are standing around like impatient undertakers, ready to slam the lid on this rally. Well, they’ll be right eventually, and the market will pull back. When it does, you should use that opportunity to buy. And today, I’ll tell you two industries I would buy with both hands.
First, let me give you four reasons why I believe the market will zig-zag higher.
- The “Trump Trampoline™” is in effect. As I explained last week, President Trump and the Fed are working determinedly together to float stocks higher on a flood of easy money. This drives FOMO (fear of missing out) in the market. And that makes traders go “buy-buy-buy”!
- Thanks to tax-law changes, companies are now bringing and keeping cash at home. They either park it in short-term bonds (which affects the yield curve) and/or buy their own stocks. Speaking of that …
- S&P 500 companies repurchased $223 billion of their own shares in the fourth quarter, up 63% from a year earlier. This pushes up stock prices.
- We are now in a “blackout period,” when S&P companies can’t buy their own stocks due to earnings coming out.
This could trigger short-term weakness. But it’s only short-term. It would be smart to add to select positions in anticipation of the next move higher.
So what would I buy?
#1. Ride the Tsunami. As the White House and Fed pump up the markets, hot sectors and industries will do well. One that should continue to do well — and yet has pulled back in the very short term — is cannabis.
Why? Because pot isn’t even legal on the federal level in the U.S. yet. Meanwhile, consumer spending on cannabis (thanks to state-by-state legalization) is expected to rise to $16.9 billion this year after reaching an estimated $12.2 billion in 2018, according to a report Arcview Market Research and BDS Analytics.
Imagine what will happen when actual legalization happens.
By the way, recently I explained why legalization could be sooner than you might think.
While we’re waiting for the legalization wagon to roll into town, I expect we’ll see a wave of mergers next. That could prove very lucrative for investors who own the right stocks.
#2. Buy the Obvious Values. By that, I mean energy stocks are so cheap that they have the most to gain in any U.S. market rally. Here’s a chart of the price-to-book ratio of the S&P Energy Index divided by the price-to-book ratio of the S&P 500 as a whole.
Energy has underperformed the broad market recently, even as the price of oil has rallied, because investors expect the oil rally to fail. While oil has rallied about 37% this year, the energy sector is up only about 16%, after getting knocked on its patoot at the end of last year.
Meanwhile, OPEC is holding the line on cheating on production quotas … inventories in the U.S. are tightening … and global demand is rising.
That sure sounds bullish to me.
So, here’s the bottom line: There are forces lining up to push stocks higher. Meanwhile, energy looks like a bargain. And both energy and select cannabis-leveraged stocks look like they could lead the next rally in the broad market.
Two ways to play this would be to buy the ETFMG Alternative Harvest ETF (NYSE: MJ) and the SPDR S&P Oil & Gas Equipment & Services ETF (NYSE: XES).
I may trade in and out of these myself, because that’s my trading style. Do your own research before buying anything. But DON’T listen to those who are all too ready to slam the lid on this market. This rally has a lot of life left in it, and pullbacks can be bought.
All the best,
Sean
